Break the Economic Cycle
By Tom Goergen
Special to The Pilot
The main cause of our continuing economic woes is lack of demand. Demand is, in part, a function of income and wealth. The greater your income, the more spent on goods and services. People spend more when they get a raise. The wealth effect works similarly. The wealthier you perceive yourself, the more you feel able to spend.
In this recession, both income and wealth have plummeted. Unemployment skyrocketed as business reacted to future sales prospects by reducing staff. Asset markets, especially the housing and stock markets, have fallen substantially. This has resulted in reduced ability and desire to make discretionary purchases and, in many cases, basic necessities.
This is the typical story of cyclical economic downturn. When times are good, market psychology overstates reality, eventually being brought back to earth with a thud. At that moment, things look even bleaker than they have to be. But, perception brings about its own change in reality by beginning a vicious cycle of downward expectations - leading to more layoffs, leading to less demand, poorer profits, confirming even lower expectations, and so forth.
During the Great Depression, economist John Maynard Keynes realized that this vicious cycle could be broken if temporary lack in consumer demand could be replaced by demand from another source, the government sector.
If we increase employment and wages, keep commodity and consumer prices from falling, we radically alter the psychology of the players in the economic marketplace. Expectations are changed, demand recovers, underlying economic reality presents itself, and recovery begins.
This temporary increase in government spending is called a stimulus: medicine to shock the economy out of its depressive state. It is typically financed by short-term borrowing, resulting in a government deficit. Between World War II and the turn of the century, tax revenues were allowed to recover as the economy strengthened. Therefore, deficits were temporary. Government debt stabilized as economic growth resumed.
Why is our situation more severe, the medicine not working as well as it used to?
This is more than a typical downturn in the business cycle. Deep structural fissures have developed in our economy over the past 30 years as a result of the way we deregulated and, more importantly, of the earthquake we call globalization.
Without disputing the basic economic fact that trade can be good for all, each participant specializing in activities where they have a comparative advantage, globalization has produced both winners and losers. Theoretically, as long as the planet is better off, some winners' gains could be redistributed to losers and everyone be no worse than before. That is not what happens in real life.
Most, of a certain age, are well aware of growing trade deficits, government deficits and record levels of private and public borrowing. Our generation has borrowed to maintain the appearance of prosperity.
How do we break out and make positive changes?
First, by realizing, important as they are, our major corporations' main motivation is profit maximization. They must reduce cost and cut wages, sometimes investing in labor saving technology, sometimes finding cheaper labor overseas.
Even if layoffs result in economywide reduction in demand and reduced sales, individual corporations have greater incentive to cut costs for their own survival, rather than employ someone not absolutely necessary, hoping that others do the same. In the short run, business will not reduce unemployment. But government can. Remember the WPA and CCC?
Often, in job-creating, small business' greatest pressure is competition from huge corporations. Economies of scale, purchasing power that reduces cost from suppliers and political favors - all combine, making it exceedingly difficult for the small guy to profit. Comparative advantage does not count in a binary world where your doors are either open or closed.
We need a level playing field for American workers and small business. Americans are justifiably wary and unsure of the benefits of government involvement. Although we "hate" them when they make a wrong call, we would not enjoy sports without referees and rules that make the game fair.
At the dawn of the global economy, we were promised all would benefit. Workers and producers would access expanding markets. Consumers would see cheaper goods and services. Due to unbalanced trade, the benefits did not materialize for the majority of our labor market.
Americans have relatively good wages and access to credit. We can buy cheaper goods from overseas. The underdeveloped world has meager wages, little access to credit and an aversion to borrowing. They cannot afford our products.
Shouldn't foreign producers pay their fair share for the infrastructure that keeps the American consumer economy strong? How about a value-added tax like they have in Europe? What if it replaced the payroll tax and the income tax for anyone making less than twice the median income (reducing impact on the lower middle class)?
What if it were creditable against the corporate income tax, (corporations rebating their portion of the payroll tax to employees)? That could rebalance the scales! What if states and localities were encouraged to ease tax and regulation on small business?
These things and more could be done to restructure our economy if we all drop our rhetorical weapons and start talking with each other for the good of the country. Our domestic rivals are generally good people. When we realize that, we can put ideology aside and begin to move forward based on common sense.
Tom Goergen lives in Southern Pines. Contact him at firstname.lastname@example.org.
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